30 Questions
What is the name of the price one pays for using a unit of another person's money?
Interest rate
Which factor has greatly enhanced competition due to globalization?
Increased market size
What technological advances have driven significant growth in derivative instruments?
Development of high-speed processors
In the context of technological advances, what allows for instantaneous worldwide conferencing?
Advances in telecommunications
What has facilitated the more rapid movement of information according to the text?
Advances in software programs
Which aspect has globalization not brought about, as mentioned in the text?
Irrelevance of other parts of the world
What was the initial hedging tool available before the development of option pricing models?
Forwards contracts
Who developed the option pricing models that were used to determine the prices of call and put options?
Black and Scholes
What did the work of economic theorists give rise to, which led to the growth of derivatives in financial markets?
New financial products for risk management
What type of risk typically emerges in certain derivative trading?
Market risk
How would you describe the derivative market in India?
Relatively new and developing
What is the purpose of the various committees that have been set up to review the functioning of financial and derivative markets in India?
To ensure that investors' risk management needs are fulfilled
Which Act regulates forward/futures contracts in commodities across India?
The Forwards Contracts (Regulation) Act, 1952
Which regulatory authority has jurisdiction over commodity forward/futures contracts?
Forward Markets Commission (FMC)
Which regulatory authority oversees derivatives trading in securities?
Securities Exchange Board of India (SEBI)
What is a defining characteristic of a financial derivative?
Both a and b
Which of the following is NOT a feature of financial derivatives?
Its value is fixed and does not change.
What are some examples of underlying assets that financial derivatives can be based on?
All of the above
What is the primary difference between short-term and long-term futures contracts?
Short-term futures mature within a year, while long-term futures mature in more than a year.
How is the price of an interest rate futures contract derived?
The price is 100 minus the implied interest rate.
What is the key reason that the default risk is nil for these interest rate futures contracts?
The prices depend only on the interest rates, not on the creditworthiness of the parties.
What is the primary purpose of using a long hedge with T-bill futures?
To hedge against short-term interest rate risk.
How can an interest rate futures contract be used to convert a fixed-rate loan to a floating-rate loan?
By using the futures contract to compensate for changes in the underlying interest rate.
What is the primary benefit of using a short hedge with interest rate futures for an issuer of a floating-rate loan?
It compensates the issuer for having to pay higher interest rates to investors.
What is one of the key roles of derivatives in financial markets?
Disseminating information on futures markets trading
How do derivatives contribute to resource allocation in the economy?
By facilitating appropriate and superior allocation of resources
Why do derivatives enhance liquidity in the markets for underlying assets?
Because they are based on margin trading, requiring less capital upfront
How do derivatives assist investors and fund managers?
By enabling them to devise strategies for proper asset allocation and yield increase
What effect do derivatives have on price structure in the markets?
They smooth out price fluctuations, squeeze price spreads, and integrate price structure
How do derivatives contribute to the growth of financial markets?
By encouraging competitive trading and accommodating different risk preferences
Explore the regulations governing forward and futures contracts in India, including the jurisdiction of the Forward Markets Commission (FMC) over commodity contracts and the inclusion of derivative contracts in securities under the Securities Contracts (Regulation) Act, 1956.
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